Ahead of its all-important second-quarter fiscal 2018 earnings report, Johnson & Johnson (NYSE:JNJ) finds itself in an unenviable situation. On a year-to-date framework, JNJ is one of the worst companies in the Dow Jones Industrial Average, shedding nearly 11%. Only four other companies have worse performances. So will the JNJ earnings report turn things around or is 2018 not salvageable?

At the surface level, and even if you go down a little deeper, Johnson & Johnson’s circumstances don’t appear bright. Over the trailing 52-week period, JNJ stock has dropped 5.6%. In fact, shares haven’t moved since two years ago to this day. Granted, most people who buy JNJ do so either as a defensive strategy, or as a solid, longer-term opportunity.

Still, the risk to the Johnson & Johnson faithful is that other investors lose patience, especially the institutional shareholders. Presently, the company features over 66% institutional ownership, and only 0.12% insider ownership. Clearly, this is a stock that the fat cats drive. That’s fine when things are good, but Johnson & Johnson is a Dow laggard, making the latest JNJ earnings report all the more critical.

Another big issue is that the household brand’s peers and partners are also underwater this year. Consumer-goods rival Procter & Gamble (NYSE:PG) is the second-worst Dow component, just ahead of the hemorrhaging 3M (NYSE:MMM). Pharmacy retailer Walgreens (NASDAQ:WBA) shares similar market-underperformance metrics with JNJ.

And then there’s Walmart (NYSE:WMT). A consumer-goods specialist is going to have problems if their primary retail channel isn’t up to snuff. Yet that’s exactly what we’re seeing with WMT stock, which is down more than 11% YTD.

Thus, the JNJ earnings report faced a two-way battle: it had to beat expected targets, and convince buyers of industry viability. Let’s see how it did:

A Solid JNJ Earnings Beat in a Tough Market

Keeping in line with prior performances over the years, Q2 saw another solid JNJ earnings beat. Against an adjusted earnings-per-share consensus target of $2.07, the company delivered $2.10, or a 1.4% upside. However, it’s fair to point out that consensus was near the lower end of the estimate spectrum, which ranged from $2.03 to $2.25.

That said, this morning’s result showed significant progress from the year-ago quarter, which saw a $1.83 EPS against a $1.80 expected target.

For revenues, the JNJ earnings report also produced a beat. Against a consensus estimate of $20.39 billion, total sales hit $20.8 billion, or a positive surprise of 2%. Notably, this was a 10.6% lift from Q2 2017 results, where the company rang up $18.8 billion.

Unsurprisingly, the pharmaceuticals division was the runaway leader, delivering virtually half of total revenues at $10.35 billion. This figure represents nearly a 20% lift from the $8.64 billion haul seen in the year-ago quarter. Within the pharmaceutical category, cancer drugs scored big, reaching $2.46 billion. This was up 42.2% YOY, or 38.7% excluding currency-exchange rate impact.

The other businesses, medical devices and consumer goods, held up the fort well. The former rang up nearly $7 billion in top-line sales, up 3.7% from the year-ago quarter. Several analysts point out that consumer goods was the laggard, producing $3.5 billion against last year’s $3.48 billion haul. But in the bigger picture, this division did what it needed to do.

Worth noting is that among all three divisions, their respective international component grew substantially more than domestic sales.

The one blemish in the JNJ earnings report was management downgrading its 2018 adjusted EPS range to $8.07 to $8.17. Previously, it was $8 to $8.20, possibly indicating industry-wide pressures.

Focus Increasingly on Pharmaceutical Pricing

Over the last several JNJ earnings reports, the overriding theme about the company’s potential successes is pharmaceutical pricing. While Johnson & Johnson features three strong businesses, its pharmaceutical division is the only one bringing home the bacon. Factors that can upset that dynamic, such as President Trump’s ambiguous drug-pricing proposal, may hurt JNJ stock.

The facts bear this out plainly for all to see. Last year, Johnson & Johnson’s pharmaceutical division brought in almost $36.3 billion, or an 8.3% lift from 2016’s results. Its medical devices and diagnostics division delivered $26.6 billion, a 5.9% YOY increase. The consumer business rang up $13.6 billion, or a mere 2.2% lift.

Notably, since 2011, only pharmaceuticals have shown meaningful growth. Medical devices have only grown 3%, while consumer goods are down 8.6%. Meanwhile, pharmaceuticals jumped nearly 49%.

To get a true gauge of the most recent JNJ earnings report requires clarification on Trump’s drug plan. Although the President has repeatedly promised lower prices for American consumers, to accomplish, this may mean increasing international rates. That’s going to be a major challenge given that our standing with our traditional allies has been compromised.

Such a plan also requires diving deeply into the incredibly convoluted and nuanced world of pharmaceutical pricing. Investors typically don’t like ambiguity, and some may be convinced to seek more stable ground.

With that said, I think JNJ stock is a solid investment, as long as you have some patience. Unlike many other pharmaceuticals, Johnson & Johnson has two strong businesses that can help ease challenges such as drug-patent expiry. While these divisions aren’t growing rapidly, they’re still delivering multi-billion dollar sales in an overall tough market.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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